UK shares are some of the best in the world when it comes to generating an income stream. Why? Because the London Stock Exchange is home to arguably the most generous dividend policies, with substantial yields often exceeding those found on international exchanges.
Just looking at the FTSE 100, 25% of its constituents currently offer a yield higher than 5%. And with earnings starting to ramp up now that inflation is finally cooling, these shareholder payouts may be on the verge of getting even bigger.
That’s quite the rebound from 2020, when around half of these companies were forced to cut or suspend dividends. And with stock prices still depressed from last year’s correction, investors could capitalise on the bargains and set up a portfolio on the right path for success.
In fact, given sufficient time, it’s possible to establish a £56,000 passive income, securing a more comfortable retirement in the process. Here’s how.
What can investors expect to earn?
On average, the UK’s flagship index has delivered an average annualised return of around 8% after dividends. Tapping into these gains with a low-cost index fund is an easy way for investors to start accumulating wealth with little involvement.
However, for those happy to play a more active role, picking individual high-quality shares could unlock superior returns. And even if that means just an extra 2% in annual gains, this could make a massive difference in the long run.
To demonstrate, if I were to invest £500 each month at a 10% annualised return, I’d have just shy of £1.4m in my investment account after 32 years. And by following the 4% withdrawal rule, this translates into an income stream of £56,000. By comparison, this same target would take closer to 37 years at an 8% return.
Returns aren’t guaranteed
On paper, becoming a millionaire in the stock market is a long but relatively straightforward process. However, in practice, the journey can be quite volatile. 2022 served as a perfect reminder of this, with many investors selling off positions in a panic.
However, such rash decision-making can be the downfall of a thriving portfolio. This is especially true for stock pickers who are already exposed to additional levels of risk. Don’t forget a poorly constructed or managed portfolio can very easily destroy wealth rather than create it.
In the long run, periods of volatility are less of a concern. However, even the world’s greatest portfolio can still be put into a tailspin during times of heightened uncertainty. And while it will likely eventually recover, the timing of such events could mean investors have considerably less than expected when the time comes to retire.
In my opinion, discipline and emotional temperament are far more critical for success than analytical abilities. They’re also some of the hardest skills to achieve.
But those with the heart to resist the fear of loss and focus on the long-term potential of underlying businesses may find themselves significantly better off by investing in UK shares today.
The post How I’d aim to make a £56,000 second income with UK shares and never work again appeared first on The Motley Fool UK.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023